GET READY TO PAY MORE AT SETTLEMENT FOR THE DC TRANSFER OR RECORDATION TAXES!!!!!
In the past when our DC Clients went to settlement the selected Settlement Company would collect the 1.1% tax or 1.45% tax from BOTH Buyer and Seller (DC) based off the CONTRACT/PURCHASE PRICE of the transaction. (1.1% for residential properties <$400,000 and 1.45% for residential properties >$400,000.00) Things are changing......
On a recent transaction one of our Buyers purchased a foreclosure for $64,000; a steal to be sure! The assessed value for 2010 is over $200,000.00 The nationally known settlement company who we use quite a bit and is phenomenal, collected the usual taxes from both parties. A few short weeks later, DC contacted the settlement company to advise them that the taxes should have been collected on the proposed 2010 assessed taxes for the property, not the contract/purchase price. They explained that this has ALWAYS been the law; it just has not been interpreted this way or enforced. A lot of back and forth went on that I am not going to include here, but I appreciate the settlement companies attempt to get this over turned.....here is the point from the settlement company....
Dear Ms. Williams:
This transaction is a small one and I know Larry Todd has greater issues on his plate. I have been unable to get him to focus on the difference between assessed value, nominal consideration and fair market value. As a result, he has rejected the recording of this Deed without payment of recordation and transfer taxes that he says are due based on the 2010 assessed value of the property, because the sales price is less than 30% of it.
I don't believe that formula applies to this transaction.
Definitions according to the D.C. Code:
Recordation Tax:
The recording of all deeds to real estate in the District. The basis of the tax is the value of consideration given for the property. Where there is no consideration or where the consideration is nominal, the tax is imposed on the basis of the fair market value of the property.
DC Code Citation: Title 42, Chapter 9.
Transfer Tax:
Each transfer of real property at the time the deed is submitted for recordation. The tax is based upon the consideration paid for the transfer. Where there is no consideration or where the amount is nominal, the basis of the transfer tax is the fair market value of the property conveyed. DC Code Citation: Title 47, Chapter 9.
Nominal Consideration:
In the Final Rulemaking of 1999 it states: "there are no regulations governing the basis on which the Recorder of Deeds may deem consideration paid to be nominal. Under these final rules, the fair market value of the property may be deemed nominal where the consideration paid bears no resemblance to the fair market value of the property".
The Final Rulemaking goes on to state that "under D.C. law, the recordation tax is assessed based on the consideration paid, and the transfer taxes are paid based on the higher of the assessed value or the sales price, unless no consideration is paid and/or the consideration paid is deemed to be nominal."
Further, the Final Rulemaking states that if the consideration paid is deemed to be nominal, the recordation and transfer taxes are then based on the fair market value of the property.
Fair Market Value:
"The most probable price at which a particular piece of real property, if exposed for sale in the open market with a reasonable time for the seller to find a purchaser, would be expected to transfer under prevailing market conditions between parties who have knowledge of the uses to which the property may be put, both seeking to maximize their gains and neither being in a position to take advantage of the exigencies of the other". DC Code 47-802(4)
It appears to me that Mr. Todd is defining "fair market value" as the assessed value of the property, which it is not in an arms length transaction, such as this one.
The assessed value is an element used to determine nominal consideration, not the fair market value of the property.
I do not believe that the D.C. law intended for the Recorder of Deeds office to penalize D.C. homeowners by taxing arms-length transactions in which there is actual consideration and fair market value, because the fair market value of the property is less than 30% of the assessed value.
I believe that it was intended as a formula for taxing non-arms length transactions in which there is no actual consideration of there is a claim that the consideration is nominal, but when the consideration is nominal but there is actual consideration, then the tax is to be paid based on that consideration, if it is fair market value.
Attached are the documents that support that this is an arms-length transaction in which there is actual consideration paid. The contract is proof of this and the appraisal supports that the consideration paid fits the definition of "fair market value". The only other document that I can provide in support of this argument is a copy of the MRIS listing that shows how long the property has been on the market and the reductions in the asking price before a purchaser was found.
I know you are not in a position to overrule Mr. Todd's decision, but I value your opinion. Can you explain to me the flaw in my logic?
Thank you for taking the time to review this matter.
